Contents
Chairman's Letter to Shareholders 1
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Financial Highlights 3
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Operational Review 4
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Consolidated Financial Statements 6
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Notes to Consolidated Financial Statements 10
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Report of Independent Auditors 22
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Management's Discussion and Analysis 23
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Mission Statement
of Exchange Bancshares, Inc. 37
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Directors, Officers and Employees
of Exchange Bancshares, Inc. 37
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Mission Statement
of The Exchange Bank 38
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Directors, Officers and Employees
of The Exchange Bank 39
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Office Locations 40
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The Annual Meeting of Shareholders will be held at Eastwood High School, 4900
Sugar Ridge Road, Pemberville, Ohio following a dinner for shareholders to be
held at 6:30 p.m. on Wednesday, May 19, 1999.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Annual Report filed with the Securities and Exchange Commission
on Form 10-KSB is available without charge upon written request to:
Joseph R. Hirzel
Secretary
237 Main Street, Box 177
Luckey, Ohio 43443
(419) 833-3401
<PAGE>
Dear Shareholder,
During 1998 Exchange Bancshares, Inc. arrived at an important milestone with
the acquisition of Towne Bank. This acquisition allowed us to enter two new
markets in very fast growing communities in our current trading area as a
locally owned independent community bank. These locations enable us to obtain
our fair share of these markets in Lucas and Wood counties. Long range this
has growth potential which will provide increased profitability for our
shareholders.
We continue to be responsive and flexible in meeting the financial needs of
our customers. We have available to our customers all types of consumer and
commercial loan products and many varied deposit products, leasing of
equipment, courier services for our customers, and much more, As a result of
becoming affiliated with PRIME VEST Financial Services, Inc. our shareholders
and customers have access to other financial services such as; financial
management and retirement strategies, college funding strategies, and other
alternative investments. In addition to these services, we are able to offer
trust referral services, as well.
Upon entering the new market areas and offering the new products and services,
we faced the necessity to hire additional personnel and re-assign
responsibilities of a number of current employees. Thus enabling us to
deliver our products and services more efficiently and effectively which
provides for customer satisfaction. These changes will provide us with the
opportunity grow profitably in the future.
At year end 1998 we reported total assets of $94.7 million as compared to
$72.8 million at year end 1997. This represents a $21.9 million, or a 31%
increase. Also at year end 1998 we reported total loans of $62.9 million,
total deposits of $85.2 million and total shareholders' equity of $9.0
million. This compares to the year end 1997 total loans of $46.9 million,
total deposits of $63.9 million and total shareholders' equity of $8.4
million. Thus we have experienced good growth in all areas, a major portion
resulting from the acquisition of Towne Bank in mid-June 1998.
Interest income increased from $5.6 million in 1997 to $6.6 million in 1998.
Interest expense increased from $2.4 million in 1997 to $3.0 million in 1998.
The result of this was an increase in net interest income of $451,000 from the
$3.2 million reported in 1997 to the $3.6 million in 1998. Other income,
which includes service charges, fees and miscellaneous income, increased
$100,000 in 1998 compared to 1997 .
Other operating expenses also increased during 1998 as direct result of the
acquisition of Towne Bank. Salaries and benefit expense increased with the
addition of new personnel, occupancy expense increased with the expansion into
two additional banking locations and professional and accounting fees
increased as direct result of the due diligence procedures, as well as the
legal and accounting services required in connection with Towne Bank
acquisition. The corporation also experienced normal increases in other
operating expenses as well. As a result, the corporation's yearly earnings
decreased to $672,000, or by 19.52 percent, compared to the $835,000 earnings
recorded for 1997.
It should be noted that there were no provisions for possible loan losses
during 1998 or 1997. This is a direct result of the maintenance of high loan
underwriting standards, increased loan portfolio diversification and the
ongoing servicing and collection efforts by the bank's loan personnel. Bank
management is to be commended for their efforts in effectively managing the
loan portfolio.
The Year 2000 issue ("Y2K") was first addressed in 1997. Since then a great
deal of time and energy has been expended by bank personnel in planning,
assessing, identifying, surveying and testing the various computer hardware
and software components. It is anticipated that all of the testing will be
completed by June 30, 1999. Contingency plans are being prepared in the event
a computer system failure (hardware or software) should occur. The cost of
all of these efforts is nearly $200,000. As a result we feel that we will be
in compliance the regulatory requirements and will be ready for the next
millennium.
It is important that we provide quality service to our customers in a timely
and efficient manner. We are pleased to note that Tom Elder, President and
CEO of The Exchange Bank, our banking subsidiary, and his management team
<PAGE>
have focused on the training and education of their staff in order to make
products and services available and to compete effectively in our market
area. In this way we will be able to continue to grow profitably for the
benefit of our customers and shareholders.
1998 has been a very busy year -- normal banking activity continued to
increase, Y2K required a considerable amount of time and talent and the
efforts necessary with the acquisition of Towne Bank. This has provided us
with many challenges as well as excellent opportunities. Much time, effort
and energy has been expended on the part of our entire Board of Directors,
Management and staff.
I want to thank the Board of Directors and the entire staff for their tireless
efforts and dedication which was had during 1998, in reaching this important
milestone for Exchange Bancshares. Most important, we sincerely thank our
shareholders for the continued loyalty and support which you have given us.
Thanking you, we remain,
Exchange Bancshares, Inc.
/s/ Marion Layman
- -----------------------------
Marion Layman
Chairman
<PAGE>
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Six-Year Consolidated Financial Summary
In thousands, except per common share amounts and ratios 1998 1997 1996 1995
1994 1993
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
Statements of Income
Interest Income $6,587 $5,565 $5,211 $4,958 $4,673 $4,863
Interest Expense 2,958 2,387 2,174 2,038 1,892 2,142
----- ----- ----- ----- ------ ------
Net interest income 3,629 3,178 3,037 2,920 2,781 2,721
Provision for loan losses 0 0 75 120 80 60
----- ----- ----- ----- ------ ------
Net interest income after provision for loan losses 3,629 3,178 2,962 2,800 2,701 2,661
Non-interest income 420 320 314 230 307 357
Non-interest expenses 3,124 2,288 2,195 2,150 2,175 2,131
----- ----- ----- ----- ----- -----
Income before income taxes 925 1,210 1,081 880 833 887
Income tax expense 253 375 334 268 253 262
----- ----- ----- ------ ----- -----
Net income $ 672 $ 835 $ 747 $ 612 $ 580 $ 625
====== ====== ====== ====== ====== ======
Per Common Share
Net Income
Basic $1.30 $1.63 $1.44 $1.17 $1.11 $1.20
Diluted 1.30 1.63 1.44 1.17 1.11 1.20
Dividends declared 0.49 0.47 0.40 0.34 0.36 0.34
Stockholders' equity 17.18 16.37 15.11 14.19 12.55 12.42
Selected Consolidated Balance Sheet Data at December 31,
Assets $94,684 $72,795 $68,206 $66,140 $64,903 $67,357
Investment securities 19,470 18,768 20,848 20,579 22,791 25,105
Loans (B) 61,332 46,248 40,963 37,856 36,583 35,515
Deposits 85,191 63,928 60,158 58,625 60,878 60,805
Borrowed funds 173 198 0 0 0 0
Shareholders' equity 9,014 8,443 7,817 7,429 6,574 6,495
Ratios (C)
Per $100 of average assets
Net Interest Income (tax-equivalent basis) $4.34 $4.51 $4.54 $4.46 $4.12 $4.05
Provision for loan losses 0 0 0.11 0.18 0.12 0.09
---- ---- ----- ----- ----- -----
Net interest income after provision for loan losses 4.34 4.51 4.43 4.28 4.00 3.96
Non-interest income 0.50 0.45 0.46 0.35 0.45 0.53
Non-interest expense 3.70 3.20 3.24 3.26 3.19 3.14
---- ---- ---- ---- ---- ----
Income before income taxes 1.14 1.76 1.65 1.37 1.25 1.34
Income tax expense 0.34 0.59 0.55 0.44 0.40 0.42
---- ---- ---- ---- ---- ----
Net income $0.80 $1.17 $1.10 $0.93 $0.85 $0.92
===== ===== ===== ===== ===== =====
Leverage (D) 9.60 8.79 8.91 9.33 10.44 10.76
Return on average shareholders' equity 7.66% 10.28% 9.82% 8.67% 8.90% 9.92%
Average shareholders' equity to average assets 10.41% 11.38% 11.23% 10.71% 9.57% 9.29%
Dividend payout ratio 37.80% 28.74% 27.71% 29.08% 32.07% 28.64%
Tier 1 capital ratio at December 31 14.00% 16.10% 21.30% 20.30% 19.60% 17.50%
Tier 1 and Tier 2 capital ratio at December 31 15.30% 17.30% 22.60% 21.50% 20.80% 18.80%
Leverage ratio 9.10% 9.90% 11.10% 10.70% 10.10% 9.40%
</TABLE>
(A) Includes $11 cumulative effect of accounting change regarding accounting
for income taxes in 1993.
(B) Net of unearned income.
(C) Based on average balances and net income for the periods.
(D) The ratio of average assets to average shareholders equity.
<PAGE>
In June 1998 Towne Bank, Perrysburg, Ohio, was acquired and merged into
The Exchange Bank. As a result the total assets of the bank increased by
approximately $17 million. The merger also meant the expansion into the
Perrysburg and Sylvania communities through two additional branch banking
facilities.
There were costs associated with this expansion as there are with all
such growth. As a result the 1998 earnings reflect these costs. Additional
occupancy expenses were incurred with the expansion into two additional
banking facilities, there were data processing costs associated with computer
conversions, personnel costs increased with the addition of staff, legal,
accounting and other professional services were needed to effect the
acquisition and merger, as well as the normal inflationary increases in other
miscellaneous operating expenses. Overall, the performance of the bank was
enhanced by the additional revenue obtained through employment of depositors
funds, primarily in the form of loans, federal funds and investment
securities.
1998 has proven to be a year of transition. Total assets have increased
significantly from $72,795,000 to $94,684,000, or 30.07%. Total deposits also
increased from $63,928,000 to $85,191,000, or 33.26%. Increases were also
noted in both loans outstanding, 34.14%, and total shareholders' equity,
6.74%. These increases are partially attributable to the acquisition of Towne
Bank. The remainder represents the Bank's normal growth and retention of
earnings.
Shareholder value is continuing to increase as evidence by the increase
in both the book and market value of an individual share. At December 31,
1998, the book value of a share of common stock was $17.18 which was 4.95%
higher than at December 31, 1997. The average market price per share
(the quarterly high plus the quarterly low divided by two) also increased
to $20.71 per share for 1998 from $16.33 per share for 1997. This represent an
increase of 26.82% for the year. Dividends per share were $0.49 per share
in 1998 compared to $0.47 per share and $0.40 per share in 1997 and
1996, respectively.
Average loans outstanding have continued to grow as they have since 1993.
Total average loans outstanding for 1998 were $55,059,000 as compared to
$44,265,000 and $39,556,000, for 1997 and 1996, respectively. This is a
24.38% increase for 1998 as compared to 1997, which had increased 11.90% as
compared to 1996. A significant portion of the increase is attributable to
the acquisition of Towne Bank, estimated to be approximately one-third of the
total increase in average outstanding for the year. Management is continually
monitoring and reviewing the credit needs of the Bank's customers and, when
possible, have added additional loan products and services to meet those
needs.
Asset quality is another indicator that is utilized to measure the a
bank's performance. The level of non-performing assets is one of the indicators
that management, banking regulatory authorities and investors monitor.
By definition, a non-performing asset is a loan that has been placed on
non-accrual status, is 90 days or more past due and/or has been restructured.
Real estate acquired through foreclosure proceedings or classified as "other
real estate owned" and investment securities in default are also classified as
non-performing assets. Over the past six years Management of The Exchange
Bank has improved the credit quality of the loan portfolio and continues to
improve the Bank's underwriting standards. As a result, non-performing loans
have been maintained at levels below one percent of total assets. The
<PAGE>
increase in the number of loans classified as non-performing at December 31,
1998, is attributable primarily to those loans acquired in conjunction with
the Towne Bank merger.
Total average deposits have also increased for the third consecutive year.
Average deposits outstanding during 1998 were $74,969,000 compared to
$62,914,000 and $59,877,000 during 1997 and 1996, respectively. Average
deposits have increased by 19.16%, 5.07% and 2.14% for the years 1998, 1997
and 1996, respectively. The Bank had been experiencing a favorable deposit
growth prior to the acquisition of Towne Bank whose deposits were declining
prior to the merger.
Capital adequacy has been and currently is a "key measure" of a
corporation's ability to succeed in today's economic environment. Exchange
Bancshares has been able to maintain and improve its capital strength through
earnings retention and planned expansion and growth since its formation in
1992. At December 31, 1998, the average equity to average asset ratio was a
strong 10.41% down from the 11.38% at December 31, 1997. This decline is
primarily attributable to the purchase and subsequent merger of Towne Bank
into The Exchange Bank. It should be noted that this ratio is significantly
greater than the 9.29% for the year 1992, and is still more than adequate to
provide for additional growth and acquisitions in the future as it has
during 1998.
Adequate capital is not the only measure of a strong corporation. The
stability of management, employee turnover, and the over-all community
reputation are just as important in maintaining investor confidence. We
believe that Exchange Bancshares and its subsidiary have a very favorable
ranking in these areas.
Exchange Bancshares, Inc. and its subsidiary, The Exchange Bank, are
poised to meet the challenges of the next millennium. We have reviewed
our data processing systems and are implementing changes and have upgraded
our equipment to ensure a smooth transition to the Year 2000 and beyond.
We are dedicated to serving the financial needs of the communities in which
we operate. It is our mission to maximize shareholder value, be responsive to
our customer needs, and to provide our staff with a positive environment to
meet these goals.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
1998 1997
---- ----
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 3,092 $ 2,224
Interest bearing demand deposits in banks 21 42
Federal funds sold 4,874 3,926
------- -------
Total cash and cash equivalents 7,987 6,192
Investment securities
Securities available-for-sale 18,448 16,362
Securities held-to-maturity, fair values
of $1,030 and $2,405 1,022 2,406
------ ------
Total investment securities 19,470 18,768
Mortgage loans held-for-sale 602 0
Loans 62,874 46,872
Allowance for loan losses (1,542) (624)
------ ------
Net loans 61,332 46,248
Premises and equipment, net 3,910 844
Accrued interest receivable 689 625
Deferred income taxes 357 10
Other assets 337 108
------ ------
TOTAL ASSETS $94,684 $72,795
======= =======
LIABILITIES
Deposits:
Noninterest-bearing $ 9,655 $ 6,371
Interest-bearing 75,536 57,557
------ ------
Total deposits 85,191 63,928
Borrowed funds 173 198
Accrued interest payable 171 149
Other liabilities 135 77
------ ------
TOTAL LIABILITIES 85,670 64,352
------ ------
SHAREHOLDERS' EQUITY
Preferred shares ($25.00 par value) 750 shares
authorized, 0 shares issued 0 0
Common shares ($5.00 par value) 750,000 shares
authorized, 524,620 and 499,534 issued 2,623 2,498
Additional paid-in capital 3,786 3,370
Retained earnings 2,546 2,626
Treasury stock at cost, 3,525 and 8,439 shares (50) (126)
Accumulated other comprehensive income 109 75
------ ------
TOTAL SHAREHOLDERS' EQUITY 9,014 8,443
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $94,684 $72,795
======= =======
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 , 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,168 $ 4,159 $ 3,756
Interest and dividends on investment securities 1,059 1,212 1,262
Interest on federal funds sold 358 192 193
Interest on due from bank deposits 2 2 0
------- ------ -------
TOTAL INTEREST INCOME 6,587 5,565 5,211
------- ------ -------
INTEREST EXPENSE
Interest on deposits 2,946 2,379 2,174
Interest on advances from Federal Home Loan Bank 12 8 0
------ ----- ------
TOTAL INTEREST EXPENSE 2,958 2,387 2,174
------ ----- ------
NET INTEREST INCOME 3,629 3,178 3,037
Provision for loan losses 0 0 75
----- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,629 3,178 2,962
OTHER INCOME
Service charges on deposits 281 260 260
Other income 139 60 54
----- ----- -----
TOTAL OTHER INCOME 420 320 314
----- ----- -----
OTHER EXPENSES
Salaries and employee benefits 1,364 1,112 1,079
Occupancy and equipment, net 459 295 287
Bank and ATM charges 98 79 77
Credit card 80 56 50
Data processing 111 87 88
Directors fees 66 62 51
Examination and accounting fees 338 116 97
State and other taxes 119 108 109
Postage and courier 88 61 58
Supplies and printing 131 92 88
Other expenses 270 220 211
----- ----- -----
TOTAL OTHER EXPENSES 3,124 2,288 2,195
----- ----- -----
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 925 1,210 1,081
Federal income tax expense 253 375 334
------ ------ ------
NET INCOME $ 672 $ 835 $ 747
====== ======= ======
EARNINGS PER SHARE:
Basic $1.30 $1.63 $1.44
Diluted $1.30 $1.63 $1.44
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of shares Amounts (Dollars in thousands)
-------------------------- -------------------------------------------------------------
Accumulated
Additional other Compre-
Common Treasury Common paid-in Retained Treasury
comprehensive hensive
stock stock stock capital earnings stock income
income
----- ----- ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
December 31, 1995 453,092 (898) $2,265 $2,801 $2,282 ($13) $ 94
Net income 747 $747
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $17 (34) (34)
----
Comprehensive income $713
Cash dividends declared ====
($.40 per share) (207)
5% stock dividend declared 22,655 (125) 114 249 (363)
Purchase treasury stock (7,372) (118)
------- ------- ----- ----- ----- ----- ------
December 31, 1996 475,747 (8,395) 2,379 3,050 2,459 (131) 60
Net income 835 $835
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
Net of tax of $8 15 15
-----
Comprehensive income $850
=====
Cash dividends declared
($.47 per share) (240)
5% stock dividend declared 23,787 (532) 119 309 (428)
Purchase treasury stock (2,620) (42)
Sale of treasury stock 3,108 11 47
------- ------ ------ ----- ----- ----- ---
December 31, 1997 499,534 (8,439) 2,498 3,370 2,626 (126) 75
Net income 672 $672
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $18 34 34
---
Comprehensive income $706
====
Cash dividends declared
($.49 per share) (253)
5% stock dividend declared 24,976 (422) 124 375 (499)
Issuance of common stock 110 1 2
Sale of treasury stock 5,336 39 76
------ ------- ------- ----- ------ ----- ----
December 31, 1998 524,620 (3,525) $2,623 $3,786 $2,546 ($50) $109
======= ======= ====== ====== ====== ===== =====
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 672 $ 835 $ 747
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0 75
Loss on sale of other real estate owned 0 1 0
Gain on sale of premises and equipment 0 0 (1)
Depreciation 216 119 131
Goodwill amortization 1 0 0
Deferred income taxes (47) 5 2
Investment securities amortization (accretion) 84 107 134
Originations of sale of loans held-for-sale (4,676) 0 0
Proceeds from loans held-for-sale 4,074 0 0
Changes in operating assets and liabilities:
Accrued interest receivable 27 21 (58)
Accrued interest payable (24) 28 26
Other assets 25 33 (36)
Other liabilities (75) (33) 5
------ ------ ------
Net cash provided by operating activities 277 1,116 1,025
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities 0 0 (100)
Proceeds from maturities of held-to-maturity securities 1,357 738 605
Purchases of available-for-sale securities (6,201) (4,742) (9,360)
Proceeds from maturities of available-for-sale securities 5,305 6,000 8,400
Proceeds from merger with Towne Bank 918 0 0
Net increase in loans (2,072) (5,307) (3,182)
Purchases of premises and equipment (3,211) (71) (110)
Proceeds from sale of equipment 0 0 1
Proceeds from sale of other real estate owned 0 21 0
------ ------- -------
Net cash used in investing activities (3,904) (3,361) (3,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand,
and savings deposits 5,563 (530) (302)
Certificates of deposit 18 4,299 1,950
Proceeds from long-term Federal Home Loan Bank advances 0 200 0
Payments on long-term Federal Home Loan Bank advances (24) (2) 0
Issuance of common stock 3 0 0
Purchase of treasury stock 0 (42) (118)
Sale of treasury stock 115 58 0
Dividends paid (253) (240) (207)
------ ------ -----
Net cash provided by financing activities 5,422 3,743 (1,323)
----- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,795 1,498 (1,398)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,192 4,694 6,092
------ ------ -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $7,987 $6,192 $4,694
====== ====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $2,982 $2,359 $2,148
Cash paid during the year for income taxes 331 406 300
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
================================================================================
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Exchange Bancshares, Inc. (the "Bancorp") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, The Exchange Bank, (the "Bank"). The Bank generates commercial
(including agricultural), mortgage and consumer loans and receives deposits
from customers located primarily in portions of Lucas and Wood Counties in
Northwest Ohio. The Bank operates under a state bank charter and provides
full banking services. As a state bank, the Bank is subject to regulations by
the State of Ohio Division of Financial Institutions and the Federal Reserve
System through the Federal Reserve Bank of Cleveland (FRB).
Basis of Consolidation
The consolidated financial statements include the accounts of Exchange
Bancshares, Inc. and its wholly-owned subsidiary, The Exchange Bank, after
elimination of all material intercompany transactions and balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions in
the agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However the amount of change that is reasonably possible cannot be
estimated.
Investment Securities
Debt securities are classified as held-to-maturity when the Bancorp has the
positive intent and ability to hold the securities to maturity. Securities
held-to-maturity are carried at amortized cost. The amortization of premiums
and accretion of discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Securities available-for- sale are carried at fair value
with unrealized gains and losses reported in other comprehensive income.
Realized gains (losses) on securities available-for-sale are included in other
income (expense) and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on
sales of securities are determined on the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate
basis. Net unrealized losses are recognized in a valuation allowance through
charges to income. Gains and losses on the sale of loans held for sale are
determined using the specific identification method.
<PAGE>
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination fees, as well as certain direct origination costs, are
deferred and amortized as a yield adjustment over the lives of the related
loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only to the extent of interest
payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change
could occur in the allowance for loan losses in the near term. However, the
amount of the change that is reasonably possible cannot be estimated. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Changes in the
allowance related to impaired loans are charged or credited to the provision
for loan losses.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost
net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
Other Real Estate Owned
Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value
less estimated selling cost at the date of foreclosure. Any write-downs based
on the asset's fair value at the date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried at the
lower of their new cost basis or fair value less cost to sell. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs related to
development of real estate is capitalized. Valuations are periodically
performed by management, and any subsequent write-downs are recorded as a
charge to operations, if necessary, to reduce the carrying value of a property
to the lower of its cost or fair value less cost to sell.
Income Taxes
Income taxes are provided for the tax effects reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of available-for-sale securities,
allowance for loan losses, accumulated depreciation, non-accrual loan
interest, deferred acquisition costs and net deferred loan fees. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The Bancorp
files a consolidated income tax return with its subsidiary.
Statements of Cash Flows
The Bancorp considers all cash and amounts due from depository institutions,
interest-bearing deposits in other banks, and federal funds sold to be cash
equivalents for purposes of the statements of cash flows.
Reclassifications
Certain amounts in 1997 and 1996 have been reclassified to conform with the
1998 presentation.
<PAGE>
NOTE B - BUSINESS COMBINATION
On June 19, 1998, the company acquired Towne Bank, Perrysburg, Ohio in a
business combination accounted for as a purchase. Immediately after the
purchase, Towne Bank was merged with and into The Exchange Bank. Towne Bank
was a full service community bank with facilities in Perrysburg and Sylvania,
Ohio and had approximately $16.8 million in assets. The results of operations
of Towne Bank are not included in the accompanying financial statements due to
Towne Bank ceasing to exist after it was acquired. The total cost of the
acquisition was $3,101,000, which exceeded the fair value of the assets of
Towne Bank by $40,000, which is being amortized on the straight-line method
over 15 years.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1996:
(Dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
Net interest income $3,985 $3,750 $3,191
====== ====== ======
Net income $ (227) $(381) $ 148
======= ====== ======
Earnings per share:
Basic $(0.44) $(0.74) $ 0.29
======= ======= ======
Diluted $(0.44) $(0.74) $ 0.29
======= ======= ======
The above amounts reflect adjustments for amortization of goodwill and income
taxes.
NOTE C - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank and another correspondent banks. The required reserve at
December 31, 1998 and 1997 was $755,000 and $560,000, respectively.
<PAGE>
NOTE D - INVESTMENT SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
Available-for-sale
- ------------------
(Dollars in thousands)
December 31, 1998 December 31, 1997
--------------------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized
Unrealized Fair
Cost Gains Losses Value Cost Gains Losses
Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
U.S.
Government $10,967 $135 $ 0 $11,102 $12,169 $108 $ 0 $12,277
Federal agency 2,778 7 0 2,785 0 0 0 0
Corporate
debt securities 4,015 26 (2) 4,039 3,712 8 (2) 3,718
Equity
securities 522 0 0 522 367 0 0 367
----- ---- ---- ------ ------ ---- ------ -------
Total
available-for-sale 18,282 168 (2) 18,448 16,248 116 (2) 16,362
====== ==== ===== ====== ====== ===== ====== ========
Held-to-maturity
- ----------------
State &
municipal securities 605 12 0 617 1,171 18 0 1,189
Mortgage-backed
securities 417 0 (4) 413 1,235 0 (19) 1,216
--- ---- ---- ----- ----- ---- ----- -------
Total
held-to-maturity 1,022 12 (4) 1,030 2,406 18 (19) 2,405
------ ---- ---- ----- ----- ---- ----- -------
Total $19,304 $180 $ (6) $19,478 $18,654 $134 $(21) $18,767
======= ==== ===== ======= ======= ==== ===== =======
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity at December 31, 1998, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Amounts maturing in : Cost Value Cost Value
---- ----- ---- ------
<S> <C> <C> <C> <C>
One year or less $ 6,920 $ 6,980 $ 328 $ 331
After one year through five years 10,840 10,946 277 286
Mortgage-backed securities 0 0 417 413
Equity securities 522 522 0 0
------- ------- ------ -----
Total $18,282 $18,448 $1,022 $1,030
======= ======= ====== ======
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
The bank did not sell any securities in 1998, 1997, or in 1996.
<PAGE>
Investment securities with a carrying value of approximately $9,831,000 and
$8,500,000 were pledged at December 31, 1998 and 1997 to secure certain
deposits.
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1998 and 1997 are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Loans secured by real estate:
Construction $ 250 $ 0
Farmland 2,959 2,978
One-to-four family residential properties 31,813 24,353
Multifamily (5 or more) residential properties 1,173 1,337
Nonfarm nonresidential properties 14,817 8,855
Agricultural production 880 709
Commercial and industrial 2,880 955
Consumer 7,115 6,322
Municipal 983 1,360
Other loans 4 3
------- -------
Total $62,874 $46,872
======= =======
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses:
Balance beginning of year $ 624 $ 508 $ 483
Allowance related to loans acquired 961 0 0
Provision for loan losses 0 0 75
Recoveries on loans 82 185 18
Loans charged off (125) (69) (68)
------ ----- ------
Balance, end of year $1,542 $ 624 $ 508
======= ===== ======
</TABLE>
At December 31, 1998 and 1997, the total recorded investment in impaired loans,
all of which had allowances determined in accordance with SFAS No. 114 and No.
118, amounted to approximately $720,000 and $17,000, respectively. The average
recorded investment in impaired loans amounted to approximately $394,000 and
$17,000 for the years ended December 31, 1998 and 1997, respectively. The
allowance for loan losses related to impaired loans amounted to approximately
$385,000 and $15,000 at December 31, 1998 and 1997, respectively. Interest
income on impaired loans of $63,000, $1,000 and $2,000 was recognized for cash
payments received in 1998, 1997 and 1996, respectively. The bank has no
commitments to loan additional funds to borrowers whose loans have been
classified as impaired.
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders, and their affiliates. Such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other
customers, and did not, in the opinion of management, involve more than a
normal credit risk or present any other unfavorable features. The aggregate
amount of loans to such related parties at December 31, 1998 was $437,000.
During the year ended December 31, 1998, new loans made to such related
parties amounted to $142,000 and payments amounted to $140,000.
Loans with carrying amounts of $22,000 were transferred to other real estate
owned in 1997. No loans were transferred to other real estate owned in 1998
or in 1996.
<PAGE>
NOTE F - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 follows:
(Dollars in thousands)
1998 1997
---- ----
Land $ 724 $ 105
Buildings 3,220 1,250
Equipment 1,545 853
----- -----
5,489 2,208
Accumulated depreciation (1,579) (1,364)
------ ------
Total $3,910 $ 844
====== ======
NOTE G - DEPOSITS
Deposit account balances at December 31, 1998 and 1997, are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Noninterest-bearing $ 9,655 $ 6,371
Interest-bearing demand 14,835 9,757
Savings accounts 15,990 14,591
Certificates of deposit 44,711 33,209
------- -------
Total $85,191 $ 63,928
======= =======
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $7,838,000 and $6,090,000 at
December 31, 1998 and 1997.
Certificates maturing in years ending December 31, as of December 31, 1998:
(Dollars in thousands)
1999 $31,737
2000 10,505
2001 1,831
2002 389
2003 and thereafter 249
-------
Total $44,711
=======
The Bank held related party deposits of approximately $748,000 and $465,000 at
December 31, 1998 and 1997, respectively.
Overdrawn demand deposits reclassified as loans totaled $3,000 and $4,000 at
December 31, 1998 and 1997, respectively.
<PAGE>
NOTE H - BORROWED FUNDS
Borrowed funds are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current Balance
Interest -----------------------
Rate 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal Home Loan Bank advances
Fixed rate advances, with monthly principal
principal and interest payments
Advance due July 1, 2017 6.85% $173 $198
==== ====
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by all shares of
FHLB stock owned by the Bank (totaling $280,000) and by 100% of the Bank's
qualified mortgage loan portfolio (totaling approximately $31,813,000). Based
on the carrying amount of FHLB stock owned by the Bank, total FHLB advances
are limited to approximately $5,602,000.
The aggregate minimum future annual principal payments on FHLB advances are
$24,000 in 1999, $22,000 in 2000, $19,000 in 2001, $17,000 in 2002, $14,000 in
2003 and $77,000 after 2003.
NOTE I - FEDERAL INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense
Current tax expense $300 $370 $332
Deferred tax expense (47) 5 2
---- ---- ----
Total $253 $375 $334
==== ==== ====
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax at 34% $315 $411 $368
Tax exempt income
Current tax expense (37) (46) (39)
Net operating loss carryforward (19) 0 0
Other (6) 10 5
---- ---- ----
Total $253 $375 $334
==== ==== ====
</TABLE>
<PAGE>
A cumulative net deferred tax asset is included in other assets at December
31, 1998 and 1997. The components of the asset are as follows:
(Dollars in thousands)
1998 1997
---- ----
Differences in available-for-sale securities $ (56) $ (39)
Differences in depreciation methodsCurrent tax expense (54) (57)
Differences in accounting for loan losses 436 111
Differences in accounting for loan fees (18) (2)
Differences in interest income for nonaccrual loans 3 4
Differences in acquisition costs 48 0
Net operating loss carryforward of acquired company 366 0
Other (2) (7)
------ ------
Total 723 10
Valuation allowance (366) 0
------ ------
Total $ 357 $ 10
====== ======
Deferred tax assets $ 853 $ 115
Deferred tax liabilities (130) (105)
Valuation allowance (366) 0
------ ------
Net deferred tax asset $ 357 $ 10
====== ======
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit , which are not
included in the accompanying consolidated financial statements. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheet.
Financial instruments whose contract amount represents credit risk were as
follows:
(Dollars in thousands)
1998 1997
---- ----
Home equity lines $ 1,226 $ 1,155
Credit card lines 3,040 2,160
Other loan commitments 7,456 2,642
------- -------
Total $11,722 $ 5,957
======= =======
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
<PAGE>
The Bank has not been required to perform on any financial guarantees during
the past two years. The Bank has not incurred any losses on its commitments
during the past two years.
The Bank maintains several bank accounts at six banks. Accounts at an
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. Cash at two of these institutions exceeded federally insured
limits. The amount in excess of the FDIC limit totaled $1,517,000.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank periodically is subject to claims and lawsuits which arise in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the financial position of the Bank.
NOTE L - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it
may pay without prior regulatory approval. The Bank normally restricts
dividends to a lesser amount. At December 31, 1998, no retained earnings was
available for the payment of dividends to the holding company without prior
regulatory approval.
NOTE M - EMPLOYEE BENEFIT PLANS
In 1968 The Exchange Bank initiated a Profit Sharing Plan which includes all
employees who have been employed by the Bank for at least one year and those
who work at least one thousand hours per year. Under the plan the Bank
contributed five percent of net income after provision for income taxes,
adjustments for chargeoffs and recoveries, and after provision for cash
dividend to the shareholders. Early in 1994 this Profit Sharing Plan was
changed to a Prototype Cash or Deferred Profit Sharing Plan and
Trust/Custodial Account Plan. This new plan includes a 401(k) plan, also.
Under the new plan the Bank will match fifty cents for each dollar which the
employee voluntarily contributes to the plan. This match by the Bank is
limited to three percent of the employee's annual salary. The contributions
made by the bank for the years 1998, 1997 and 1996 were $30,000 each year.
Thirty-seven employees participated in the plan during 1998, thirty-five in
1997, and twenty eight employees participated in the plan during 1996.
NOTE N - STOCK DIVIDEND
On June 15,1998, the Company distributed 24,976 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend,
common stock was increased by $124,000, additional paid-in capital was
increased by $375,000, and retained earnings was decreased by $499,000. All
references in the accompanying financial statements to the number of common
shares and per share amounts for 1997 and 1996 have been restated to reflect
the stock dividend.
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve Bank (FRB). Failure to
meet minimum capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material affect on the Bancorp and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject
to qualitative judgements by the regulators about components, risk weightings,
and other factors.
<PAGE>
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all of the capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
<S>
(Dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Risk-Based Capital
(to Risk Weighted Assets) $9,500 15.3% $4,980 8.0% $6,225 10.0%
Tier I Capital
(to Risk Weighted Assets) 8,712 14.0 2,490 4.0 3,735 6.0
Tier I Capital
(to Average Assets) 8,712 9.1 2,860 3.0 4,767 5.0
As of December 31, 1997:
Total Risk-Based Capital
(to Risk Weighted Assets) $7,827 17.3% $3,610 8.0% $4,513 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,262 16.1 1,805 4.0 2,708 6.0
Tier I Capital
(to Average Assets) 7,262 9.9 2,212 3.0 3,686 5.0
</TABLE>
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excluded certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices.
Loans held-for-sale: Fair value of mortgages held-for-sale are stated at
market.
<PAGE>
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed-rate certificates of deposit are estimates
using a discounted cash flow calculation that applies interest rates currently
offered on certificates to a schedule of aggregated contractual expected
monthly maturities on time deposits.
Accrued interest: The carrying amounts of accrued interest approximate the
fair values.
Borrowed funds: The carrying amounts of borrowed funds are estimated using
discounted cash flow analysis based on interest rates currently being offered
borrowed funds.
The estimated fair values of the Company's financial instruments at December
31 are as follows:
(Dollars in thousands)
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $7,987 $7,987 $ 6,192 $ 6,192
Investments securities 19,470 19,478 18,768 18,767
Loans held-for-sale 602 602 0 0
Loans 61,332 61,748 46,248 46,265
Accrued interest receivable 689 689 625 625
Financial liabilities:
Deposits 85,191 85,078 63,928 63,858
Borrowed funds 173 184 198 203
Accrued interest payable 171 171 149 149
NOTE Q - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Exchange Bancshares, Inc. (parent company
only) follows:
Condensed Balance Sheets
at December 31,
(Dollars in thousands)
1998 1997
---- ----
Assets
Noninterest-bearing deposit with subsidiary bank $ 64 $ 58
Time deposit with subsidiary bank 0 1,000
Investment in subsidiary bank 8,861 7,337
Deferred income taxes 48 0
Other assets 41 48
----- -----
Total assets $9,014 $8,443
====== ======
Liabilities and Shareholders' Equity
Shareholders' Equity $9,014 $8,443
====== ======
<PAGE>
Condensed Statements of Income
Years ended December 31,
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
Interest on deposits in subsidiary bank $ 21 $ 0 $ 0
Dividends from subsidiary bank 2,455 1,335 287
------ ----- ------
Total income 2,476 1,335 287
Expenses
Salaries 23 22 21
Accounting and consulting fees 200 32 24
Other expenses 58 49 40
----- ----- -----
Total expenses 281 103 85
----- ----- -----
Income before income taxes and equity in undistributed
earnings of subsidiary 2,195 1,232 202
Income tax (provision) benefit 88 35 29
Income before undistributed earnings of subsidiary 2,283 1,267 231
Equity in undistributed earnings of subsidiary (1,611) (432) 516
------ ------ -----
Net income $ 672 $ 835 $ 747
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31,
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $672 $835 $747
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes (48) 0 0
Change in other assets 7 6 45
Equity in undistributed earnings of subsidiary 1,611 432 (516)
----- ----- -----
Net Cash from Operating Activities 2,242 1,273 276
----- ----- -----
Cash Flows from Investing Activities
Purchase of time deposit 0 (1,000) 0
Maturity of time deposit 1,000 0 0
Purchase of Town Bank (3,101) 0 0
------- ------ -----
Net cash provided by (used in)
financing activities (2,101) (1,000) 0
------- ------- ------
Cash Flows from Financing Activities
Proceeds from sale of common stock 3 0 0
Purchase of treasury stock 0 (42) (118)
Sale of treasury stock 115 58 0
Cash dividends paid (253) (240) (207)
------ ------ ------
Net Cash Used for Financing Activities (135) (224) (325)
Net Increase (decrease) in Cash
and Cash Equivalents 6 49 (49)
Cash and Cash Equivalents
Beginning of year
End of year 58 9 58
------ ------ ------
$ 64 $ 58 $ 9
====== ====== ======
</TABLE>
<PAGE>
(Accountant's Letterhead)
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Exchange Bancshares, Inc.
Luckey, Ohio
We have audited the consolidated balance sheets of Exchange Bancshares,
Inc. and Subsidiary as of December 31, 1998, and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated fiancial postion of
Exchange Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Robb, Dixon
/s/ Francis, Davis, Oneson
/s/ & Company
Robb, Dixon
Francis, Davis, Oneson
& Company
Granville, Ohio
March 3, 1999
<PAGE>
INTRODUCTION
Description of Business
Exchange Bancshares, Inc. (the "Holding Company" or the "Corporation")
was organized as an Ohio corporation and incorporated by directors of The
Exchange Bank (the "Bank") under Ohio law on October 13, 1992 at the direction
of the Board of Directors of the Bank for the purpose of becoming a bank
holding company by acquiring all of the outstanding shares of Bank Common
Stock. The Holding Company acquired the Bank effective January 1, 1994. The
Holding Company has authorized 750,000 common shares, par value $5.00 per
share of which 465,098 are currently outstanding.
The Holding Company also has authorized 750 preferred shares, par value
$25.00 per share without designating the terms of the preferred shares. No
preferred shares are currently outstanding or presently intended to be issued.
Exchange Bancshares, Inc. is a bank holding company engaged in the
business of commercial and retail banking through its subsidiary, The Exchange
Bank, which accounts for substantially all of its revenues, operating income,
and assets. The Holding Company may in the future acquire or form additional
subsidiaries, including other banks, to the extent permitted by law.
The Holding Company is subject to regulation by the Board of Governors of
the Federal Reserve System which limits the activities in which the Holding
Company and the Bank may engage. The Bank is supervised by the State of Ohio,
Division of Financial Institutions. The Bank is a member of the Federal
Reserve System and is subject to its supervision. The Bank is also a member of
the Federal Deposit Insurance Corporation (FDIC). As such, the Bank is
subject to periodic examination by the Division of Financial Institutions of
the State of Ohio and the Federal Reserve Board. The Holding Company and the
Bank must file with the U. S. Securities and Exchange Commission, the Federal
Reserve Board and Ohio Division of Financial Institutions the prescribed
periodic reports containing full and accurate statements of its affairs.
The Bank conducts a general banking business embracing the usual
functions of a commercial, retail and savings bank, including: time, savings,
money market and demand deposit accounts; commercial, industrial,
agricultural, real estate, consumer installment and credit card lending; safe
deposit box rental, automated teller machines, and other services tailored to
individual customers. The Bank makes and services secured and unsecured loans
to individuals, firms and corporations. The Bank continuously searches for
new products and services which are made available to their customers in order
that they may remain competitive in the market place.
Forward-Looking Statements
When used in this Form 10-KSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated,"
"projected," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including changes in economic conditions in the Bank's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Bank's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect the Holding
Company's financial performance and could cause the Holding Company's actual
results for future periods to differ materially from any statements expressed
with respect to future periods. See Exhibit 99.2 hereto, "Safe Harbor Under
the Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
The Holding Company does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
The following discussion is intended to focus on and highlight certain
financial information regarding the Bank and should be read in conjunction
with the Consolidated Financial Statements and related Notes to Consolidated
Financial Statements, which have been prepared by the Management of Exchange
Bancshares, Inc. in conformity with generally accepted accounting principles
("GAAP"). The Board of Directors engaged Robb, Dixon, Francis, Davis, Oneson
and Company, independent auditors, to audit the financial statements, and
their report is included on page XX of this report. To assist in under-
standiing and evluating major changes in the Holding Company's and the
Bank's financial position and results of operations, two and three year
comparisons are provided in tabular form for ease of comparison.
Three major areas of discussion that follow are an analysis of (a) assets
and liabilities including and interest rate sensitivity, (b) shareholder's
equity including dividends and risk-based capital, and (c) 1998 results
of operations.
FINANCIAL CONDITION
Loan Portfolio. Loans, as a component of earning assets, represent a
significant portion of earning assets at December 31, 1998. The Bank offers a
wide variety of loans including commercial, consumer, and both residential and
commercial real estate in its primary marketing area of northwestern Ohio. At
<PAGE>
December 31, 1998, the Bank did not have any loan concentrations which
exceeded 10% of total loans or significant amounts of loans for agricultural
purposes.
Average loans increased 24.38% in 1998 to represent 69.43% of average
earning assets compared to 65.29% in 1997 and 61.48% in 1996. Year-end total
real estate loans of $51,012,000 represented approximately 81.13% of the total
loans outstanding. The portion of the loan portfolio represented by real
estate loans has increased from 72.74% at December 31, 1994 to 81.13% at
December 31, 1998. Installment loans to individuals have increased moderately
to 11.32% of loans outstanding at December 31, 1998 continuing the trend begun
in 1997. Prior to 1997 the installment loan portfolio had been declining
steadily since 1993 when they comprised 16.60% of total loan portfolio. The
dollar amounts of commercial loans (including tax-exempt loans) increased in
1998 to 6.14% of the total loans outstanding primarily as a result of the
acquisition of Towne Bank in June 1998. Prior to 1998 the commercial loan
portfolio had remained constant, however, their relative portion of the loan
portfolio had decreased from 6.38% at December 31, 1994 to 4.94% at December
31, 1997. The dollar amount of agricultural loans outstanding at December 31,
1998 represented 1.40% of the total loans outstanding. Agricultural loan
outstanding have remained relatively constant over the last four years while
the relative portion of total loans has continued to decline. The table
entitled "Loan Information" provides a five-year summary of the loan history.
<PAGE>
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Loan Information
In thousands, except ratios 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans at December 31,
Commercial $2,880 955 783 851 1,353
Agricultural 880 709 802 943 1,259
Real estate
Secured by 1-4 family residential properties 31,813 24,353 20,826 19,037 17,815
Secured by other properties 19,199 13,170 11,449 10,637 9,162
Consumer 7,115 6,322 6,067 6,132 6,476
Tax-exempt 983 1,360 1,533 798 1,013
All other 4 3 11 4 9
------- ------ ------ ------ ------
Total $62,874 46,872 41,471 38,402 37,087
======= ====== ====== ====== ======
Allowance for Loan Losses
Balance at beginning of year 624 508 483 465 469
Allowance related to acquired loans 961 0 0 0 0
Provision for loan losses 0 0 75 120 80
Charge-offs
Commercial and agricultural 0 0 0 106 17
Consumer 88 38 48 24 84
Credit Card 37 31 20 6 8
Real estate 0 0 0 0 0
--- -- -- --- ---
Total charge-offs 125 69 68 136 109
=== == == === ===
Recoveries
Commercial and agricultural 60 156 0 25 6
Consumer 19 25 13 7 15
Credit card 1 2 3 1 4
Real estate 2 2 2 1 0
----- ---- ---- ---- ----
Total recoveries 82 185 18 34 25
----- ---- ---- ---- ----
Net charge-offs 43 (116) 50 102 84
----- ---- ---- ---- ----
Balance at end of year $1,542 $624 $508 $483 $465
====== ==== ==== ==== ====
Allocation of Allowance for Loan Losses
Commercial $1,001 157 183 236 186
Consumer 84 72 68 54 28
Real estate 160 161 159 62 74
Unallocated 298 234 98 131 177
------ ---- ---- ---- ----
Total $1,543 $624 $508 $483 $465
====== ==== ==== ==== ====
Credit Quality Ratios
Net charge-offs as a percentage of average loans 0.08% (0.26)% 0.13% 0.27% 0.23%
Allowance for loan losses to
Total loans at year end 2.45% 1.33% 1.22% 1.26% 1.25%
Net charge-offs 35.86 (5.38) 10.16 4.74 5.54
Provision for loan losses to average loans 0.00% 0.00% 0.19% 0.32% 0.22%
Earnings coverage of net charge-offs 21.15 (10.43) 23.12 9.80 10.87
</TABLE>
<PAGE>
In addition to the loans reported in Loan Information table, there are
certain off-balance sheet products such as letters of credit and loan
commitments which are offered under the same credit standards as the loan
portfolio. Since the possibility of a liability exists, generally accepted
accounting principles require that these financial instruments be disclosed
but treated as contingent liabilities and thus, not reflected in the
accompanying financial statements (approximately $11.7 million). Management
closely monitors the financial condition of potential creditors throughout the
terms of the instrument to assure that they maintain certain credit
standards. Refer to Note J of the Notes to Consolidated Financial Statements
for additional information on off-balance sheet financial instruments.
Non-Performing Assets. The Table entitled "Non-performing Assets and
90-Day Past Due Loans" provides a six-year summary of nonperforming assets
which are defined as loans accounted for on a non-accrual basis, accruing
loans that are contractually past due 90 days or more as to principal or
interest payments, renegotiated troubled debt, and other real estate obtained
through loan foreclosure.
A loan is placed on non-accrual when payment terms have been seriously
violated (principal and/or interest payments are 90 days or more past due,
deterioration of the borrower's ability to repay, or significant decrease in
value of the underlying loan collateral) and stays on non-accrual until the
loan is brought current as to principal and interest. The classification of a
loan or other asset as non-accruing does not indicate that loan principal and
interest will not be collectible. The Bank adheres to the policy of the
Federal Reserve that banks may not accrue interest on any loan when the
principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection.
A loan is considered restructured or renegotiated when either the rate is
reduced below current market rates for that type of risk, principal or
interest is forgiven, or the term is extended beyond that which the Bank would
accept for loans with comparable risk. Properties obtained from foreclosing
on loans secured by real estate are adjusted to market value prior to being
capitalized in an account entitled "Other Real Estate held for resale."
Regulatory provisions on other real estate are such that after five years, or
ten years under special circumstances, property must be charged-off. This
period gives the Bank adequate time to make provisions for disposing of any
real estate property.
Loans accounted for on a non-accrual basis increased $324,000 or 532.00%
as of year-end 1998. Nonperforming assets at December 31, 1998 totaled
$514,000 or 0.54% of total assets. This represents an increase of $429,000 or
504.71% from December 31, 1997. The large increase in nonperforming assets is
attributable to the assets acquired as a result of the merger with Towne
Bank. Management is continuing to monitor these assets and strengthening the
Bank's position whenever possible.
Analysis of the Allowance/Provision for Loan Loss. The allowance for
loan losses was established and is maintained by periodic charges to the
provision for loan loss, an operating expense, in order to provide for losses
inherent in the Bank's loan portfolio. Loan losses and recoveries are charged
or credited respectively to the allowance for loan losses as they occur. See
the table entitle "Loan Information" for a five-year summary.
<PAGE>
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Non-performing Assets and 90-Day Past Due Loans
In thousands, except per share amounts 1998 1997 1996 1995 1994
1993
<S> <C> <C> <C> <C> <C> <C>
At December 31,
- ---------------------------------------
Non-accrual loans $399 75 196 336 25 49
Restructured loans 0 0 0 0 0 0
---- ---- ---- ---- ----- ----
Total non-accrual and restructured loans 399 75 196 336 25 49
Other real estate owned 0 0 0 0 26 23
---- ---- ---- ----- ---- ----
Total non-performing assets 399 75 196 336 51 72
Loans past due 90-days or more* 115 10 125 57 162 31
---- ---- ---- ----- ---- ----
Total non-performing assets and
90-day past due loans $514 85 321 393 213 103
==== ==== ==== ==== ==== ====
Impaired loans $720 17 23 0 N/A N/A
==== ==== ==== ==== ==== ====
</TABLE>
*Excludes non-accrual and restructured loans
The allowance/provision for loan losses is determined by Management by
considering such factors as the size and character of the loan portfolio, loan
loss experience, problem loans, and economic conditions in its market area.
The risk associated with the lending operation can be minimized by evaluating
each loan independently based on criteria which includes, but is not limited
to, (a) the purpose of the loan, (b) the credit history of the borrower, (c)
the market value of the collateral involved, and (d) the down payment made.
More than 90% of the Bank's total gross loans are secured by deeds of
trust on real property, security agreements on personal property, insurance
contracts from independent insurance companies or through the full faith and
credit of government agencies. The Bank's lending policies require
substantial down payments along with current market appraisals on collateral
when the loans are originated, thus reducing the risk of any potential losses.
<PAGE>
To further minimize the risks of lending, quarterly reviews of the loan
portfolio are made to identify problem loans and to determine the course of
action. Collection policies have been developed to monitor the status of all
loans and are activated when a loan becomes past due.
Management has both internal and external loan review procedures that
provide for analysis of operating data, tax returns and financial statement
performance ratios for all significant commercial loans, regulatory classified
loans, past due loans and internally identified "Watch" loans.
The loans are graded for asset quality by the reviewer and independently
analyzed by both the senior loan officer and the chief executive officer of
the bank. The results of the grading process in conjunction with independent
collateral evaluations are used by Management and the Board of Directors in
determining the adequacy of the allowance for loan loss account on a quarterly
basis.
The entire allowance for loan losses is available to absorb any
particular loan loss. However, for analytical purposes, the allowance could
be allocated based upon net historical charge-offs of each loan type for the
last five years. If applied, commercial loans would require 24.26% of the
reserve while the installment (consumer) and real estate loans would require
75.84% and 0.00%, respectively. Currently, the allowance for loan losses has
been allocated based upon the results of the loan reviews and management's
assessment of the overall portfolio and other factors as follows; commercial
loans - 64.87%, real estate loans - 10.37% and consumer loans - 5.44%. The
remaining 19.31% of the allowance is currently "unallocated". The losses
experienced, combined with the type and market value of the collateral
securing the various loans within the portfolio, is the primary reason for the
percentage allocation of the allowance to the individual loan types.
Management believes significant factors affecting the allowance are
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans at December 31, 1998. The Bank has no exposure from
troubled debts to lesser developed countries nor from significant amounts of
agricultural, real estate or energy related loans.
The average allowance to average loans outstanding ratio increased to
1.43% in 1998 from 0.90% and 0.78% in 1997 and 1996, respectively. The
allowance for loan losses to loan balances outstanding at year-end was 2.45%,
1.33% and 1.22% for years 1998, 1997 and 1996, respectively.
The Bank experienced net charge-offs in 1998 of $43,000 as compared to
net recoveries in 1997 of $116,000 and net charge-offs in the preceding three
years. The 1997 net recovery position is primarily attributed to a single
borrower. Net charge-offs in 1996 decreased to $50,000 from $102,000 in
1995. The yearly average net charge-offs for the last five-year period
(1994-1998) were $33,000.
<PAGE>
The absence of a provision for loan losses in 1998 was due to the
$961,000 allowance for possible loan losses associated with the merger of
Towne Bank as well as, the over-all quality of the loan portfolio and
management's assessment of the local economic conditions. The decrease in the
provision for the allowance for loan loss in 1997 and prior years is
attributed to efforts by Management (in 1995) to strengthen loan
administration, underwriting guidelines, and collection policies and
procedures coupled with the increase in the amount of credits granted. It
should be noted that as the Bank's loan portfolio experiences growth, there
will normally be an increase in credit losses. However, it is Management's
intention to minimize such losses through prompt loan collection efforts and
the credit review process.
Investments. Investments represent the second largest use of financial
resources. The investment portfolio, shown in the table "Other Balance Sheet
Data - Maturity of Investment Securities", includes United States Treasury and
Federal agency securities, state and municipal obligations, mortgage-backed
securities, other securities consisting of collateralized mortgage obligations
("CMO's"), corporate debt securities and equity securities of the Independent
State Bank of Ohio.
A portion of the portfolio's investment debt securities classified as
Held-To-Maturity are those securities which the Bank has the ability and
intent to hold to maturity. These securities are stated at cost adjusted for
the amortization of premium and accretion of discount, computed by the
interest method. The remainder of the debt securities and the Bank's
marketable equity investment securities are carried at market value, and
accordingly, are classified as Available-For-Sale.
In May 1993 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, beginning in
1994 debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity. At December 31, 1998 and 1997 the Holding Company's shareholders'
equity contained $109,000 and $75,000, respectively, in unrealized gains on
securities available-for-sale.
Investment securities at year-end 1998 increased $702,000 or 3.74% from
year-end 1997 while federal funds sold increased $948,000 from 1997 or
24.15%. Because the increase in total deposit account balances (primarily as
a result of the Towne Bank acquisition) exceeded the funding needs of the
Bank's loan portfolio, coupled with the interest rate structure within the
investment portfolio, excess funds were allocated primarily to the federal
fund portfolio with the remainder utilized to purchase additional investment
securities. Management maintains Federal funds sold balances consistently at
levels that will cover short-term liquidity needs of the Bank.
The Bank utilizes an outside investment firm to analyze, evaluate, and
offer investment recommendations to Management based on such criteria as
security ratings, yields, and terms. The Bank does not invest in any one type
of security over another. Funds allocated to the investment portfolio are
constantly monitored by Management to ensure that a proper ratio of liquidity
and earnings is maintained.
Deposits. The "Consolidated Average Balance Sheet and Related Yields and
Rates" table highlights average deposits and interest rates during the last
three years. Average deposits have increased in 1998, approximately
$11,060,000 or 19.90% from 1997 which had decreased from 1996, approximately
$2,169,000 or 4.06%. The average cost of funds for the bank was approximately
4.43% for the year ended December 31, 1998 compared to 4.29% and 4.07% for
1997 and 1996, respectively.
The Bank's deposit structure can be categorized as somewhat cyclical,
increasing as public depositors receive tax allocations and decreasing as
disbursements are made. Aside from the deposits acquired from the Towne Bank
merger, during 1998 the Bank also experienced continued shifting of individual
deposits from the traditional savings passbook accounts to higher yielding
time open or time certificate accounts. As a result the Bank's cost of funds
has increased steadily putting additional pressure on the net interest
margin. Management has responded to this pressure by competitively pricing
its loan products and managing the investable funds. As a result, the net
interest margin has decreased by 6 basis points since December 31, 1997.
Shareholders' Equity. Maintaining a strong capital position in order to
absorb inherent risk is one of Management's top priorities. Selected capital
ratios for the last three years, presented in the "Six-Year Consolidated
Financial Summary" table, reveal that the Bank has been able to maintain an
average equity to average asset ratio of greater than 10% for the past four
years. It should be noted that this ratio decreased by 97 basis points in
1998 to 10.41% and increased in 1997 by 15 basis points to 11.38%. The
decrease resulted primarily from a large dividend being declared to the
<PAGE>
holding company to fund the acquisition of Towne Bank. It should also be
noted that the return on average assets decreased in 1998 to $0.80 from $1.17
in 1997. This is due primarily to the additional legal, accounting and other
expenses associated with the acquisition, as well as, interest rate
fluctuations, deposit growth fluctuations, an increase in loan and investment
volumes and a modest increase in other operating costs.
The yield (interest expense) on liabilities increased more rapidly than
the yield (interest income) on interest earning assets, resulting in a
decrease in the Bank's interest margin. As indicated earlier, the average
allowance for loan losses to average loans outstanding was 1.43%, 0.90% and
0.78% for years 1998, 1997, and 1996, respectively.
<PAGE>
Banking regulations have established minimum capital ratios for banks.
The primary purpose of these requirements is to assess the riskiness of a
financial institution's balance sheet and off balance sheet financial
instruments in relation to adjusted capital. The Bank is required to maintain
a minimum total qualifying capital ratio of at least 8% with at least 4% of
capital composed of Tier I (CORE) capital. Tier I capital includes common
equity, non cumulative perpetual preferred stock, and minority interest less
goodwill and other disallowed intangibles. Tier II (supplementary) capital
includes subordinate debt, intermediate-term preferred stock, the allowance
for loan losses and preferred stock not qualifying for Tier I capital. Tier
II capital is limited to 100% of Tier I capital. At December 31, 1998, the
Bank's risk-based capital ratio for Tier I and Tier II capital was 14.10% and
15.30% respectively, thus surpassing the required 4% and 8% for Tier I and
Tier II capital. The "Risk-Based Capital" table contains a summary of both
the Bank's risk-based capital and leverage components and ratios.
RESULTS OF OPERATIONS
General. The Holding Company had consolidated net income of $672,0000 or
$1.30 basic earnings per share, for the year ended December 31, 1998 as
compared to $835,000 or $1.63 basic earnings per share for 1997 and $747,000
or $1.44 basic earnings per share for 1996. Return on average assets ratio
(ROAA) was 0.80%, 1.17% and 1.10% in 1998, 1997, and 1996, respectively.
Net Interest Income. Net interest income, the income received on
investments in loans, securities, due from banks, and federal funds less
interest paid to depository and short-term creditors to fund these investments
is the Bank's primary source of revenue. The following discussion and
analysis of the Bank's net interest income is based primarily on the tables
entitled "Consolidated Average Balances Sheets and Related Yields and Rates",
"Income Statement Data - Changes in Tax Equivalent Income", and "Interest
Sensitive Assets and Liabilities" for all years presented using the Federal
statutory rate of 34%. These tables have been prepared on a tax-equivalent
basis. The stated (pre-tax) yield on tax-exempt loans and securities are
lower than the yield on taxable assets of similar risk and maturity. The
average balances were calculated on a monthly basis.
Exchange Bancshares, Inc. and
Subsidiary
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Related Yields and Rates*
1998 1997 1996
--------------------------- ---------------------------- ------------------------------
In thousands, except ratios
Interest Average Interest Average Interest Average
Average Income Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
------- ------- ------ ------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $2,618 $2,480 $2,103
Interest bearing deposits in banks 35 $ 2 5.71% 44 $ 2 4.55% 0 $ 0
Federal funds sold 6,612 358 5.41% 3,538 192 5.43% 3,678 193 5.25%
Investment securities
Taxable debt securities 16,402 988 6.02% 18,406 1,130 6.14% 19,734 1,189 6.03%
Tax-exempt debt securities 735 52 7.07% 1,234 87 7.05% 1,223 86 7.03%
Equity securities 455 32 7.03% 314 17 5.41% 146 9 6.16%
------ ----- ------ ------ ------ -----
Total Investment securities 17,592 1,072 6.09% 19,954 1,234 6.18% 21,103 1,284 6.08%
Loans
Real Estate 28,413 2,499 8.80% 22,969 2,048 8.92% 21,235 1,912 9.00%
Consumer 6,772 847 12.51% 5,742 704 12.26% 5,743 710 12.36%
Commercial 19,874 1,840 9.26% 15,554 1,428 9.18% 12,578 1,151 9.15%
------ ----- ------ ----- ------ -----
Total loans 55,059 5,186 9.42% 44,265 4,180 9.44% 39,556 3,773 9.54%
Total earning assets 79,298 6,618 8.35% 67,801 5,608 8.27% 64,337 5,250 8.16%
----- ----- ------ -----
Allowance for loan losses (1,130) (612) (503)
Other assets 3,459 1,705 1,809
------ ------ ------
Total assets $84,245 $71,374 $67,746
======= ======= =======
Liabilities and Shareholders'
Equity
Noninterest-bearing deposits $ 8,337 $ 7,342 $ 6,474
Interest-bearing deposits
NOW accounts 10,644 77 3.54% 8,500 270 3.18% 7,910 243 3.07%
Money market accounts 1,619 44 2.72% 1,470 39 2.65% 1,658 44 2.65%
Savings accounts 15,334 391 2.55% 14,858 387 2.60% 16,100 421 2.61%
Time deposits 39,035 2,134 5.47% 30,744 1,683 5.47% 27,735 1,466 5.29%
------ ----- ------ ----- ------- -----
Total interest-bearing
deposits 66,632 2,946 4.42% 55,572 2,379 4.28% 53,403 2,174 4.07%
Borrowed funds 183 12 6.56% 107 8 7.48% 0 0
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 66,815 2,958 4.43% 55,679 2,387 4.29% 53,403 2,174 4.07%
----- ----- -----
Other liabilities 321 230 263
Shareholders' equity 8,772 8,123 7,606
------- ------ ------
Total liabilities and
shareholders' equity $84,245 $71,374 $67,746
======= ======= =======
Net interest income (tax-equivalent basis) $3,660 $3,221 $3,076
====== ====== ======
Yield spread 3.92% 3.98% 4.09%
Net interest income to earnings assets 4.62% 4.75% 4.78%
Interest-bearing liabilities to earning asset 84.26% 82.12% 83.01%
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Income Statement Data
<TABLE>
<CAPTION>
1998 Over 1997 1997 Over 1996
----------------------- -------------------------
In Thousands Volume Yield/Rate Total Volume Yield/Rate
Total
<C> <C> <C> <C> <C> <C>
Changes in Tax Equivalent Interest Income *
- -------------------------------------------
Interest Income $ 0 $ 0 $ 0 $ 2 $ 0 $ 2
Federal funds sold 167 (1) 166 (7) 6 (1)
Investment securities (146) (16) (162) (70) 20 (50)
Loans 1,019 (13) 1,006 449 (42) 407
----- ---- ----- --- ---- ----
Total 1,040 (30) 1,010 374 (16) 358
===== ==== ====== === ==== ====
Interest expense
Interest-bearing deposits 473 94 567 88 117 205
Borrowed funds 6 (2) 4 8 0 8
--- --- --- --- --- ---
Total 479 92 571 96 117 213
--- --- --- --- --- ---
Net interest income $561 $(122) $ 439 $278 $(133) $145
==== ====== ===== ==== ====== ====
</TABLE>
*Changes in the average balance/rate are allocated entirely to the yield/rate
changes
<TABLE>
Analysis of Selected Non-Interest Expenses
- ------------------------------------------
1998 % Change 1997 % Change 1996
<S> <C> <C> <C> <C> <C>
Salaries and benefits
Salaries $1,110 21.7% $ 912 3.3% $ 883
Benefits 254 27.0% 200 2.0% 196
------ ------ -----
Total $1,364 22.7% $1,112 $1,079
====== ====== ======
Occupancy and equipment
Depreciation $216 81.5% $119 (9.2)% $131
Maintenance and repairs 146 53.7% 95 25.0% 76
Real estate taxes 29 61.1% 18 5.9% 17
Insurance 17 13.3% 15 (6.3)% 16
Utilities 51 6.3% 48 2.1% 47
---- ---- ----
Total $459 55.6% $295 2.8% $287
==== ==== ====
Other expenses
Advertising $ 38 5.6% $ 36 (23.4)% $ 47
Dues and subscriptions 18 12.5% 16 23.1% 13
Telephone 48 37.1% 35 (10.3)% 39
Organizational costs 13 0.0% 13 0.0% 13
Insurance 20 11.1% 18 0.0% 18
Loan 22 37.5% 16 (11.1)% 18
Education 10 11.1% 9 (10.0)% 10
Travel and entertainment 19 18.8% 16 60.0% 10
FDIC insurance 11 57.1% 7 250.0% 2
Legal 26 136.4% 11 (8.3)% 12
Overdrafts 13 85.7% 7 0.0% 7
Other 32 (11.1)% 36 63.6% 22
--- --- ---
Total $270 22.7% $220 4.3% $211
==== ==== ====
</TABLE>
<PAGE>
The net yield on interest-earning assets has decreased to 4.62% in 1998
from 4.75% in 1997 and from 4.78% in 1996. Net interest income increased
$451,000, or 14.19%, in 1998 and $141,000, or 4.64%, in 1997, while earnings
decreased $163,000, or 19.52%, in 1998 from $835,000 in 1997 and increased
$88,000, or 11.78%, in 1997 from $747,000 in 1995. The "Income Statement Data
- - Changes in Tax Equivalent Income" table analyzes the reason for the changes
in interest income by applying either volume or rate changes to interest
sensitive assets and liabilities. Average interest-earning assets increased
to $11,497,000 and average interest-bearing liabilities increased to
$11,136,000 in 1998 which resulted in increased earnings of $561,000 (due to
volume); while the overall increase in rates for earning assets did not exceed
the overall increase in rates on interest-bearing liabilities which resulted
in a net decrease of $122,000 (due to rate) in net interest income. The net
effect of the changes in volume and interest rates was to increase interest
earnings by $439,000 during 1998.
Net loan income increased $1,009,000, or 24.26% over the prior year
primarily as a result of the increased volume resulting from the acquisition
of Towne Bank and changes in the composition of the portfolio, increased
competition from financial and non-financial sources, and Management's
strengthening of loan underwriting standards. Average loan yields have
decreased 2 basis points in 1998 after a 10 basis point decrease in 1997. As
of year-end 1998 approximately $25,863,000, or 45.77%, of the loan portfolio
is maturing or repricing in the next year. Variable rates and short-term
maturities are two tools Management is using to achieve greater flexibility in
a changing rate environment.
Interest rates on tax-free investment securities have increased two basis
points in 1998, from an average portfolio yield of 7.05% to 7.07%, and
interest rates on equity investment securities have increased 162 basis points
from an average portfolio yield of 5.41% to 7.03%, and interest rates on
taxable investment securities decreased nine basis points from an average
yield of 6.18% to 6.09%, resulting in a $16,000 decrease in taxable income due
to rates. Additionally, a $146,000 decline in income due to the volume,
resulted in a net decrease in income of $162,000. Approximately $6,662,000 of
securities matured in 1998. Reinvestment yields on approximately $7,721,000
of maturing securities in 1999 will be used to determine appropriate
maturities or alternative investments.
Federal funds sold income increased by $166,000 or 86.46% in 1998 after a
$1,000 or 0.52% decrease in 1997. Volume increased earnings $167,000 and
rates decreased earnings $1,000 in 1998. Federal funds are primarily used as
an investment mechanism for short-term liquidity purposes.
<PAGE>
Interest-bearing deposit expense increased $567,000 or approximately
23.83% in 1998 after a $205,000 or 9.43% increase in 1997. The volume
increase caused interest expense to increase $473,000 while changes in rates
caused a $94,000 increase in interest expense in 1998. Rates paid on NOW
accounts and money market accounts increased 36 and 7 basis points
respectively in 1998, compared to an increase of 11 basis points for NOW
accounts and no increase or decrease for money market accounts in 1997. The
yields on savings accounts decreased five basis points and the yield on time
deposits remained virtually unchanged in 1998. Also, competition from
non-financial institutions has continued to be a factor which is causing a
shifting of depositors' resources.
In summary, the "Changes in Tax Equivalent Income" table discloses the
reasons for changes in interest income and interest expense. It should be
noted that the changes, or restructuring, in the Bank's interest-earning
assets (loans, investments, federal funds and interest-bearing deposits) and
the interest-bearing liabilities (NOW, money market, savings, time deposits
and borrowed funds) combined with the repricing of each resulted in a decrease
in net interest margins.
The changes in both asset and liability volumes in 1998 coupled with
repricing of both interest-earning assets and interest-bearing liabilities
resulted in a net increase of $439,000 in net interest income. Changes in
volume accounted for a $561,000 increase in net interest income, while changes
in rates decreased net interest income $122,000.
The increases in both asset and liability volumes in 1997 had more of an
effect on the net interest margin, $278,000 increase, than the changes in the
yields on assets and liabilities, a $133,000 decrease.
Other Income and Other Expense. Total other income consists of operating
income attributed to providing deposit accounts for bank customers, the
disposition of investment securities prior to their maturity (which are
classified as available-for-sale), and fees from banking services.
Total other expenses consists of operating expense attributed to staffing
(personnel costs), operation and maintenance of bank building and equipment,
banking services promotion, taxes and assessments, and other operating
expenses. Table 16, "Other Income and Other Expenses," contains a summary of
these items for the years ended December 31, 1998, 1997, and 1996.
<PAGE>
Income Taxes. Applicable income taxes of $253,000 in 1998 consist of
federal taxes only. For the previous two years the federal tax rate was 34%.
Impacting the tax provisions for the three years covered in this report
is the level of the provision for possible loan losses ($-0- in 1998, $-0- in
1997 and $75,000 in 1996) and the level of tax-exempt income on securities
which was $39,000, $65,000, and $64,000 for the three years presented.
Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting
for Income Taxes" requires a liability approach to accounting for income
taxes as opposed to a deferred approach. The liability approach places
emphasis on the accuracy of the balance sheet while the deferred approach
emphasizes the income statement. Under the liability approach, deferred taxes
are computed based on the tax rates in effect for the periods in which
temporary differences are expected to reverse. An annual adjustment of the
deferred tax liability or asset is made for any subsequent change in tax
rates.
Effects of Inflation/Changing Prices
The effects of inflation on operations of the Bank occur through
increased operating costs which can be recovered through increased prices for
services. Virtually all of the Bank's assets and liabilities are monetary in
nature and can be repriced on a more frequent basis than in other industries.
Every effort is being made through interest sensitivity management to monitor
products and interest rates and their impact on future earnings.
Liquidity and Interest Rate Sensitivity Management
Management utilizes several tools currently available to monitor and
ensure that liquid funds are available to satisfy the normal loan and deposit
needs of its customers while taking advantage of investment opportunities as
they arise in order to maintain consistent growth and interest income. Cash
and due from banks, marketable investment securities with maximum one year
maturities, and federal funds sold are the principal components of asset
liquidity. Referring to "Interest Rate Sensitivity" table, the Bank is in a
liability sensitive position up to one year which is more beneficial in a
period of declining interest rates since liabilities can be repriced at lower
rates. In periods of rising interest rates, an asset sensitive position is
more favorable as interest sensitive assets may be adjusted to rising market
rates prior to maturing interest sensitive liabilities. The three-month
category of interest sensitive liabilities include approximately $30,825,000
of NOW, money market and savings accounts which can be adjusted nearly
immediately to offset any positive gap in a declining rate environment.
Management utilizes variable rate loans (on a limited basis) and
adjustable rate deposits to maintain desired net interest margins. A
procedural process has been developed to monitor changes in market rates on
interest sensitive assets and liabilities with appropriate action being taken
when warranted.
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Interest Rate Sensitivity
<TABLE>
<CAPTION>
Repricing or Maturing
Over Over Over
Within 3 Months 1 Year 3 Years After
In thousands, except ratios 3 Months to 1 Year to 3 Years to 5 Years 5 Years
<S> <C> <C> <C> <C> <C>
Loans $14,415 $14,334 $ 9,176 $7,661 $17,288
Investment securities 2,604 5,121 11,223 0 522
Other earning assets 4,895
Other assets 0 7,445
------- ------- ------- ------ -------
Total assets $21,914 $19,455 $20,399 $7,661 $25,255
======= ======= ======= ====== =======
Noninterest-bearing deposits $ 9,655
Interest-bearing deposits 37,860 24,702 $12,336 $ 638 $ 0
Borrowed funds 6 18 41 31 77
Other liabilities and equity 0 9,320
------- ------ ------- ------ -------
Total liabilities
and equity $ 47,521 $24,720 $12,377 $ 669 $ 9,397
======== ======= ======= ======= =======
Gap* $(25,607) (5,265) 8,022 6,992 15,858
Cumulative gap (25,607) (30,872) (22,850) (15,858) 0
Cumulative gap as a
percent of total assets (27.04)% 32.61)% (24.13)% (16.75)% 0.00%
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Other Balance Sheet Data
In thousands, except ratios
Maturity of Total Investment Securities (a)
<TABLE>
<CAPTION>
Carrying Value Total
Within 1 Year 1-5 Years After 10 Years No Fixed Maturity Total Market
Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield Value
------------ ------------ -------------- ------------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998
Investment securities
available-for-sale:
U.S. Treasury $6,479 6.22% $4,623 5.90% $11,102 6.09% $11,102
Federal agency 2,785 5.12% 2,785 5.12% 2,785
Corporate debt 501 6.10% 3,538 5.90% 4,039 5.92% 4,039
Equity $ 522 7.03% 522 7.03% 522
------ ------ ----- -------- ------ -------
Total securities
available-for-sale 6,980 6.21% 10,946 5.70% 0 522 7.03% 18,448 5.73% 18,448
------ ------ ----- -------- ------ -------
Investment securities
held-to-maturity:
State municipal
- tax exempt (b) 328 7.07% 277 6.86% 605 6.97% 617
Mortgage-backed 417 4.06% 417 4.06% 413
------ ------ -------- ------ -------
Total securities
held-to-maturity 745 5.38% 277 6.86% 0 0 1,022 5.79% 1,030
----- ------ ----- -------- ------ -------
Total investment
securities $7,725 6.13% $11,223 5.72% $ 0 $ 522 7.03% $19,470 5.92% $19,478
====== ======= ===== ======== ======= =======
</TABLE>
Maturity of Loans (c)
<TABLE>
<CAPTION>
Within 1-5 After 5
1 year years years Total
------ ----- ----- -----
<C> <C> <C> <C>
Commercial $10,353 7,510 1,695 19,558
Real Estate 15,510 5,750 15,683 36,943
------ ----- ------ ------
Total $25,863 13,260 17,378 56,501
======= ====== ====== ======
Fixed 3,386 2,721 7,611 13,718
Variable 22,477 10,539 9,767 42,783
------- ------ ----- ------
Total $25,863 13,260 17,378 56,501
======= ====== ====== ======
</TABLE>
Maturity of Time Deposits of $100,000 or more
<TABLE>
<CAPTION>
<S>
Within 3-6 6-12 Over 12
3 Months Months Months Months Total
-------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit and other time deposits
- ---------------------------------------------------------
$1,055 1,981 2,881 1,916 7,833
====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
<S>
Deposits at December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 9,655 6,371 6,720 5,777 6,321
Interest-bearing deposits
NOW and money market accounts 14,835 9,757 9,303 9,053 8,459
Savings accounts 15,990 14,591 15,225 16,721 18,801
Certificates of deposit 44,711 33,209 28,910 26,960 24,605
------ ------ ------ ------ ------
Total deposits $85,191 $63,928 $60,158 $58,511 $58,186
======= ======= ======= ======= =======
(a) Based on contractual maturities
(b) The yield on state municipal securities is increased by the benefit of
tax exemption, assuming a 34% federal income tax rate. For the year
ended December 31, 1998, the amount of the increases in the yields for
these securities and for total securities held-to-maturity is 1.78%
and 1.19%, respectively.
(c) Excludes consumer and residential mortgage loans of $6,373,000
</TABLE>
<PAGE>
Year 2000 Readiness
The Year 2000 ("Y2K") date change can affect any system that uses
computer software programs or computer chips, including automated equipment
and machinery. For example, many software programs and computer chips store
calendar dates as two-digit rather than four-digit numbers. These software
programs record the year 1998 as "98". This approach will work until the Year
2000 when the "00" may be read as 1900 instead of 2000. The year 2000 is more
than just a mainframe problem. It also includes firmware, embedded systems,
and external systems. Businesses, utilities and other organizations are
fixing their systems to make sure they will operate properly when the calendar
changes. Since banks rely on these systems, they are placing great emphasis
on making sure their systems are ready for the Year 2000. Because of the
importance of this issue, the Company established a committee to address the
Y2K issue. In 1997, the Board of Directors assigned an officer of the bank as
the Y2K project coordinator and a committee was formed to address the
problem. The project includes planning, assessing, testing and re-testing
with monthly progress reports being made to the Board. The objective is to
ensure that all conceivable steps are taken to facilitate a smooth transition
of all operations of the Company into the next century. The Company and the
Bank are dedicated to providing reliable, trustworthy banking to its customers
before, during and after the century transition.
Senior Management and the Board of Directors are actively involved in
overseeing internal Year 2000 efforts and monitoring the business risks posed
by vendors, business partners, counter parties and major loan customers. We
are identifying relevant systems; repairing, replacing, or upgrading systems
to resolve potential problems; and testing systems for Year 2000
compatibility. We are also working closely with our third-party service
providers to monitor their readiness for Year 2000. Management has been
assured by their software vendors that any program changes necessary to ensure
Year 2000 compliance will be completed in adequate time to prevent any
foreseeable processing problems. We plan to complete testing and have all
system changes implemented by June 30, 1999, as required by federal bank
regulators. We will have alternative methods of doing business as a
contingency should problems occur. The contingency plans address actions to
be taken to continue operations in the event of system failure due to areas
that cannot be tested in advance, such as power and telephone service, which
are vital to business continuation.
Our contingency planning will be substantially complete in advance of the
June 30, 1999 deadline. Management believes the contingency planning process
will help minimize the impact and reduce response time if the failure of a
resource occurs. Modifications will be made to this plan as required to
achieve Year 2000 readiness.
The company estimates that total Year 2000 project costs will not exceed
the budgeted amount of $140,000 of which $109,000 has already been expensed.
These costs include external consultants, purchases of hardware and software,
customer awareness materials and the direct costs of internal employees
working on the project.
<PAGE>
In accordance with the FDIC and FFIEC guidelines, we have kept, and will
continue to keep, our customers aware of the Y2K issues and keep them informed
of our progress and we ask that they will respond as to their own efforts to
achieve Year 2000 readiness. The company remains dedicated to providing the
highest level of service to its customers and shareholders, and will continue
a proactive approach to Year 2000 readiness.
Any forward-looking statements made in the foregoing Y2K discussion speak
only as of the date on which such statements are made, and the Bank undertakes
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurance of unanticipated events.
This discussion constitutes a Year 2000 Readiness Disclosure within the
meaning of the Year 2000 Readiness and Disclosure Act of 1998.
<PAGE>
<TABLE>
<CAPTION>
<S>
Exchange Bancshares, Inc. and Subsidiary
Quarterly Condensed Consolidated Financial Information
1998 Quarters 1997 Quarters
----------------------------------- --------------------------------------
In thousands, except per common share amounts
and ratios
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,829 1,819 1,503 1,436 1,467 1,404 1,380 1,314
Interest expense 837 835 660 626 643 615 577 552
----- ----- ----- ----- ----- ----- ----- -----
Net interest income 992 984 843 810 824 789 803 762
Provision for loan losses 0 0 0 0 0 0 0 0
Non-interest income 163 93 84 80 81 80 85 74
Non-interest expense 925 901 712 586 610 535 606 537
----- ----- ----- ----- ----- ----- ---- -----
Income before income taxes 230 176 215 304 295 334 282 299
Income tax expense 65 32 60 96 92 105 86 92
Net income $ 165 144 155 208 203 229 196 207
----- ----- ---- ----- ----- ----- ---- -----
Per Common Share
Net income $0.32 $0.28 $0.30 $0.40 $0.39 $0.45 $0.38 $0.41
Basic 0.32 0.28 0.30 0.40 0.39 0.45 0.38 0.41
Diluted 0.30 0 0.19 0 0.29 0 0.18 0
Dividends declared
Shareholder's equity 17.37 17.28 16.96 16.79 16.42 16.25 15.77 15.41
Stock price range
High 23.50 22.88 22.00 18.52 18.05 17.81 16.28 15.38
Low 21.88 21.50 18.05 17.33 16.62 16.62 15.38 14.47
Tax-equivalent
Yields and Rates 5.00% 4.29% 5.38% 5.41% 8.89% 5.71% 6.67%
Federal funds sold 5.25% 5.63% 5.44% 5.04% 5.49% 5.53% 5.45% 5.07%
Investment securities 6.14% 6.21% 5.96% 6.07% 6.30% 6.13% 6.18% 6.13%
Loans 9.27% 9.66% 9.24% 9.49% 9.71% 9.39% 9.40% 9.26%
Total earning assets 8.26% 8.63% 8.12% 8.31% 8.45% 8.23% 8.29% 8.12%
Interest-bearing deposits 4.38% 4.64% 4.24% 4.39% 4.44% 4.36% 4.21% 4.11%
Borrowed funds 6.55% 6.56% 6.56% 6.56% 8.08% 6.00% 7.02%
Total interest-bearing liabilities
4.38% 4.65% 4.25% 4.39% 4.45% 4.36% 4.21% 4.11%
Yield spread 3.88% 3.98% 3.87% 3.92% 4.00% 3.86% 4.08% 4.02%
Net interest income to earning assets
4.50% 4.68% 4.57% 4.71% 4.77% 4.65% 4.85% 4.74%
Ratios
Return on assets 0.69% 0.63% 0.80% 1.15% 1.11% 1.27% 1.10% 1.20%
Leverage 10.65 10.31 8.90 8.50 8.73 8.80 8.87 8.77
Return on average shareholders' equity
7.35% 6.51% 7.12% 9.73% 9.67% 11.14% 9.80% 10.53%
Average Assets
Cash and due from banks $ 2,996 $ 2,949 $ 2,348 $ 2,178 $2,226 $ 2,448 $ 2,754 $ 2,640
Interest-bearing deposits
in banks 24 28 52 37 45 70 60 0
Federal funds sold 8,462 6,320 7,064 4,602 5,317 3,980 2,567 2,288
Investment securities 17,710 17,782 17,065 17,810 19,391 19,789 20,022 20,609
Loans 62,666 60,458 50,107 47,005 45,262 44,943 44,500 42,352
------ ------ ------ ------ ------ ------ ------ ------
Total earning assets 88,862 84,588 74,288 69,454 70,015 68,782 67,149 65,249
Allowance for loan losses (1,528) (1,528) (846) (618) (630) (642) (647) (577)
Other assets 5,306 5,247 1,662 1,621 1,686 1,764 1,726 1,706
------- ------- ------- ------- ------- ------- ------- -------
Total average assets $95,636 $91,256 $77,452 $72,635 $73,297 $72,352 $70,982 $69,018
======= ======= ======= ======= ======= ======= ======= =======
Average Liabilities and
Shareholders' Equity
Noninterest-bearing deposits $10,102 $10,025 $ 6,402 $ 6,822 $ 6,874 $ 7,537 $ 7,932 $ 7,164
Interest-bearing deposits 76,084 71,824 61,815 56,804 57,591 56,178 54,771 53,744
Borrowed funds 174 175 186 197 198 200 57 0
Other liabilities 294 382 345 262 238 218 220 244
Shareholders' equity 8,982 8,850 8,704 8,550 8,396 8,219 8,002 7,866
------ ------ ------ ------ ------ ------- ------- -------
Total average liabilities
and shareholders' equity $95,636 $91,256 $77,452 $72,635 $73,297 $72,352 $70,892 $69,018
======= ======= ======= ======= ======= ======= ======= =======
<PAGE>
MISSION STATEMENT
Exchange Bancshares, Inc.
Our mission is:
- to maximize shareholder value and to provide a fair rate of return
on shareholder investment compared to industry average;
- to be responsive to customer needs, a partner in helping consumers
and businesses in our market area achieve their financial goals;
- to provide staff members with a positive environment in which to
contribute corporate success and attain career objectives.
Directors of Exchange Bancshares, Inc.
- --------------------------------------------------------------------------------
Cecil R. Adkins
Manufactured Housing
Walbridge, Ohio
Joseph R. Hirzel
Food Processing
Pemberville, Ohio
Donald H. Lusher
Manager - Real Estate
Walbridge, Ohio
Norma J. Christen
Business Owner, Retired RN
Bowling Green, Ohio
Rolland I. Huss
Farmer
Luckey, Ohio
David G. Marsh
Funeral Director
Luckey, Ohio
Donald P. Gerke
Educator
Pemberville, Ohio
Marion Layman
Banker
Luckey, Ohio
Edmund J. Miller
Television Broadcasting Engineer
Luckey, Ohio
Officers of Exchange Bancshares, Inc.
- --------------------------------------------------------------------------------
Marion Layman
Chairman and President
Rolland I. Huss
Vice Chairman
Joseph R. Hirzel
Secretary and Treasurer
<PAGE>
MISSION STATEMENT
The Exchange Bank
Our mission is to be the financial cornerstone of the communities we serve.
The Exchange Bank exits to provide superior banking services to our customers
and to provide its shareholders with a fair return on their investment.
To achieve our mission we will:
- remain an independent, locally owned, caring institution, listening
to our customers and the communities we serve;
- set high standards for employees by providing training, guidance and
a sense of pride, knowing that only through employee teamwork can our
mission be accomplished;
- provide a superior level of internal service and support to one
another;
- represent the Bank with the utmost pride, professionalism, and high
standards of ethical behavior.
We believe a commitment to high employee performance and a focus on the
quality of customer service are essential to our success and that building a
great financial organization is an ongoing process.
<PAGE>
The Exchange Bank
DIRECTORS
Cecil R. Adkins
Manufactured Housing
Walbridge
1989
Jerome A. Carpenter
Banker
Stoney Ridge
1977
Mark S. Derkin
Industrial Components Distributor
Monclova
1994
Thomas J. Elder
Banker
Elmore
1994
Donald P. Gerke
Educator
Pemberville
1994
Joseph R. Hirzel
Food Processing
Pemberville
1989
Rolland I. Huss
Farmer
Luckey
1977
Marion Layman
Banker
Luckey
1962
Donald H. Lusher
Manager-Real Estate
Walbridge
1970
David G. Marsh
Funeral Director
Luckey
1993
Edmund J. Miller
Television Broadcasting Engineer
Luckey
1996
<PAGE>
OFFICERS
Chairman
Board of Directors
Marion Layman
1990
President
Chief Executive Officer
Senior Lending Officer
Thomas J. Elder
1994
Vice President
Board of Directors
Rolland I. Huss
1994
Vice President
Chief Operations Officer
Cashier - Secretary
A. John Moore
1977
Vice President
Loan Officer
Jerome A. Carpenter
1964
Vice President
Loan Officer
Jeffrey Cross
1989
Vice President
Loan Officer
John D. Kantner
1998
Vice President
Complliance Officer
CRA Officer
Linda Biniker
1990
Assistant Vice President
William H. Nostrant
1975
Vice President
Branch Administrator
Charles M. Bailey
1995
Security Officer
Bank Secrecy Act Officer
Mary Ann Thompson
1991
Retail Banking Officer
Branch Manager
Patricia Crawford
1995
Mortgage Loan Officer
Kathy L. Meyer
1997
Loan Officer
Branch Manager
Kirk Stonerock
1998
Mortgage Loan Officer
Robert E. Walker
1999
Retail Banking Officer
Branch Manager
Keith Randall Cline
1999
<PAGE>
EMPLOYEES
Renee Appelhans
Betty Bahsen
Delors Ballard
Linda Beiswanger
Susan Beyer
Delores Bleau
Eileen Blecke
Bonnie Bowe
Melissa Buzza
Mary Ann Cashen
Heather Ellis
Donetta Erskine
Sharon Finney
Barbara Fite
Robin Friend
Christina Hall
Gina Hineline Sharon Hoffman
Charlene Judy
Casey Kania
Scot Kinney
Lois Lange
Denise Limauro
Charrisa Mallette
Pamela Maslak
Jennifer McCoy
Michelle Miller
Marvaline Mollenberg
Susan Molnar
Kristy Parker-Gordon
Joanne Pero
Janet Pohlman
Marc Quigg
Peggy Renz Deborah Robinson
Norman Schultz
Karole Shope
Rhonda Spruce
Jennifer Stewart
Tonya Wensink
Jill Williams
Diana Wright
Date denotes when elected or appointed
</TABLE>
